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Join the Race to $1-Trillion Stocks

Five technology behemoths are contenders for this new benchmark. But is it sustainable?

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By James K. Glassman, Contributing Columnist
From Kiplinger's Personal Finance, October 2017

It may be a matter of months, or more likely a few years, but sometime soon a U.S. company will breach the trillion-dollar mark. That’s $1 trillion in market capitalization—the share price multiplied by all the shares outstanding.

Until the tech-stock run-up of the past year, no company had even come close. Microsoft (symbol MSFT) reached a market cap of $616 billion in December 1999, then the record for a U.S.-based company. After the 1990s tech boom collapsed, that mark held for nearly 13 years, until Apple (AAPL) eclipsed it. Now, Apple has a market cap of $776 billion, and Microsoft ranks third at $560 billion, still below its 1999 peak. Ranking second is Google’s parent company, Alphabet (GOOGL), at $648 billion. Facebook (FB) and Amazon.com (AMZN) are neck-and-neck in fourth and fifth places, at about a half-trillion dollars. (Prices and other stock data are as of July 31 unless otherwise noted; com­panies in bold are ones I recommend.)

Following the mega techs are Berkshire Hathaway (BRK-B), Warren Buffett’s portfolio of insurance, rail, power and miscellany; Johnson & Johnson (JNJ), maker of drugs, medical devices and consumer products; and ExxonMobil (XOM), which was number one in market cap before oil prices collapsed from mid 2014 to early 2016. Then come the four largest financials: JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Visa (V).

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One of these stocks will be the first to reach $1 trillion in market cap, and it will almost certainly be one of the mega techs. Although the race to $1 trillion is exciting, it raises some bigger questions: Have tech companies become too big to manage? Are the stocks overvalued? We have, after all, seen this movie before.

Troubled past. On March 14, 2000, the Wall Street Journal published an article with the headline “Big-Cap Tech Stocks Are a Sucker Bet.” The author was Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School. The article coincided almost perfectly with the peak of the Nasdaq 100, the tech-heavy index comprising the 100 largest Nasdaq stocks (excluding financials).

There’s no doubt tech stocks were expensive at the time. In his article, Siegel wrote that of the 33 largest stocks by market cap, 18 were tech and 15 were non-tech. Of the tech stocks, nine had price-earnings ratios, based on the previous year’s earnings, “in excess of 100.”

For most of those nine, the movie didn’t end well. Nortel Networks had a market cap of $167 billion when Siegel wrote his piece, and in March 2000, it traded at 106 times earnings for the previous year. The company filed for bankruptcy protection 10 years later. Sun Microsystems, with a market cap of $149 billion and a P/E of 119, was acquired by Oracle (ORCL) for $7 billion in 2009. Even the survivors have fared poorly. The market cap of Cisco Systems (CSCO), for example, has dropped from $452 billion to $157 billion.

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Today’s mega-tech scene is different. Of the 30 largest U.S. companies, only eight are in the tech sector. Besides the five giants listed above, the others are Cisco, Oracle and Intel (INTC). Only one of the eight, Amazon, has a trailing P/E of more than 100.

Unlike the darlings of the late 1990s, today’s tech com­panies have matured—in human terms, we might think of them as being in their thirties instead of their late teens. In most cases, their sales and profits are still growing at a double-digit pace. Although they have the imagination to experiment with new ways of doing business, they possess solid managements, strong competitive positions and great balance sheets. Many big techs in the late 1990s were financially shaky, but the eight largest today are all rated either A+ or A++ (tops) for financial strength by the Value Line Investment Survey.

So who will make it to $1 trillion first? Here are my predictions for the five biggest U.S. tech stocks. I arrived at my forecasts by estimating earnings growth and changes in P/Es (based on estimated year-ahead profits), and I’ve assumed that shares outstanding remain constant.

My forecasts. Apple is hugely profitable. In the 12 months that ended June 30, the company earned $47 billion, compared with $26 billion for Microsoft. Apple’s weaknesses, however, are a dependence on only a few products and, despite its enormous hoard of cash and investments, an inability to make great acquisitions. For that reason, it is the only mega-cap tech stock that I do not recommend. Its relatively low P/E—just 16, compared with 18 for Standard & Poor’s 500-stock index—is probably indicative of the risk of depending so much on the iPhone. Let’s assume that the P/E remains the same and that earnings rise by 12% over the next 12 months and by 10% annually in later years. Under that scenario, Apple’s market cap would hit $1 trillion by March 2020.

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Earnings for Alphabet have risen in what I like to call a “beautiful line,” growing briskly every year, undeterred by recession, at an annual average of 25% for the past decade. The company’s targeted approach has completely changed advertising, and, although revenues are soaring, the price advertisers pay Google per click is declining. Still, according to AdWeek, the market for ad sales on mobile devices will increase from $47 billion in 2016 to $82 billion in 2019, and Google controls one-third of it. Google is the world’s most visited website, followed by YouTube, which Google bought in 2006. Let’s say that in year one, the forward P/E (currently 30) rises 10% and earnings increase 15%. After that, the P/E holds steady and earnings rise 10%. At that rate, Alphabet’s market cap will reach $1 trillion in a bit more than three years. (My earnings-growth forecast in this case is a little more conservative than the consensus of analysts who follow Alphabet; for some of the other mega techs, such as Apple, my forecasts are more optimistic.)

Microsoft’s earnings were nearly stagnant from 2011 to 2016 but have caught a second wind, with a fast-growing cloud-computing business, plus its gaming, LinkedIn and Office 365 subscription services. If the P/E holds steady and earnings rise 10% a year, Microsoft’s market cap will reach $1 trillion by October 2023. Although my calculations suggest that Microsoft would return a bit less than Apple over the next few years, I think Apple carries much more risk. (For more on Microsoft, see Great Dividends, Fair Prices.)

Amazon’s revenues rose 25% in the second quarter compared with the same period in 2016, but profits were well below analysts’ expectations. I am not worried. CEO Jeff Bezos is pouring money into improving customer service, but the spending increases will soon taper off, and Amazon’s profit margins will expand. The company has moved decisively into groceries with its planned purchase of Whole Foods Market. Its cloud-services business is booming, and it is finding success in TV and movies. Let’s assume that the now-stratospheric P/E of 186 will drop 20% annually for the next five years, bringing it to a more-reasonable 61. Also assume that earnings per share will rise 40% per year in those five years and 20% thereafter. Amazon will reach $1 trillion in September 2023.

Facebook is the most profitable of the five companies, as measured by net profit margin (earnings as a percentage of sales). Value Line projects a tremendous margin of 37% for 2017, compared with 25% for second-place Alphabet. The consensus of analysts is that earnings will rise 21% in 2018 and 27% in 2019. Let’s assume a more cautious 20%. Let’s also boost the forward P/E (now 29) by 10% for year one as a reward for profitability, then level it off. Under that scenario, Facebook will hit $1 trillion in just under 3½ years.

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These are only guesses, and they depend on a consistency that eludes nearly all businesses and stocks—and people. But by the time the next presidential election occurs, we may have not one, but two trillion-dollar stocks.

James K. Glassman’s most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns shares in Amazon.com.